Stalking Bubbles: Paul Tudor Jones, 1987-1990
“Don’t be a hero. Don’t have an ego.”
A long-term stock chart makes history look deceptively simple. All context and emotion have been removed. The fog of war has been lifted. Of course, we say, the big bubbles that formed eventually imploded. And look at the crashes and minor bear markets, mere blips on the roads of long bull markets. Investing starts to look easy and straightforward. That’s why I like to dig into biographies and old articles. They allow me to step into the shoes of someone who had to navigate history as it unfolded.
But rarely can we follow an investor’s thinking over the course of an investment. More often that not we get an isolated soundbite. Maybe a brief write-up in a letter. We’re left to wonder: how did they weigh new information? Did they change their mind? The reluctance to comment publicly is understandable. For established managers there is more downside than upside. Making a public call opens you up to criticism and the risk of embarrassment. It can also attach your ego further to the idea, making it harder to change your mind.
Picture my excitement when I saw that Paul Tudor Jones had participated in the Barron’s Roundtable for several years after the 1987 crash. Every January he shared his views on markets and the economy. His comments, together with the Market Wizards book and a few articles, provided a unique view of his process and the evolution of two “big short” trades. Jones became famous after shorting the US market in 1987. What is less known is that he continued to stalk both the US and Japanese stock markets, expecting both to collapse, 1929-style.
It’s a case study in patience and pragmatism. Both markets rallied for years as Jones maintained a bearish macro view. Yet he didn’t blow up his fund or turn into a perma-bear over the market behaving opposite to his views. Jones carefully managed his risk, weighed the evidence, and eventually was able to short the bursting Japanese bubble while simultaneously changing his mind on the US market, which hadn’t been in a bubble after all.
Jones started his trading career in 1976 in cotton where a family connection allowed him to get into the business. By 1980 he set up his own firm, Tudor Investment Corporation with capital from friends and family as well as the famous trading house Commodities Corp.
After the miserable stagflation of the 1970’s, the 1980’s turned into a boom time on Wall Street. Interest rates had peaked declining, Reaganomics was boosting the economy with lower taxes and significant spending. Stock valuations were low and Milken’s junk bond machine provided the capital for large scale takeovers. Fortunes could suddenly be made in leveraged buyouts, activist raids, greenmail, and arbitrage.
This zeitgeist was captured by an exchange in the movie Wall Street between the “too much cheap money” Lou Mannheim (surely a follower of Graham and Fisher) and the impatient yuppie Bud Fox.
Bud: “Lou, I got a sure thing. Anacott Steel.”
Mannheim: “No such thing except death and taxes. No fundamentals, not a good company any more. What's going on, Bud? You know something? Remember there are no shortcuts, son. Quick buck artists come and go with every bull market, but the steady players make it through the bear market. You're a part of something here, Bud. The money you make for people creates science and research jobs. Don't sell that out.”
Bud: “You're right, Lou, you're right. But you gotta make it to the big time first, then you can be a pillar and do good things.”
It’s not difficult to see why people started drawing parallels to the 1920’s: Wall Street was booming, debt was rising, the mood was optimistic and greedy:
“There is a common pattern in the 1980s and the 1920s of belief in `letting capitalism rip`, and reducing tax rates … There is also an obvious parallel in yuppie enthusiasm and speculation in investments, coming in a political climate that believes this is a productive and safe thing… Economically ambitious young people of The Great Gatsby era resembled today`s goal-oriented young people. Books on making money and capitalism were best-sellers. Old-line industries were suffering while financial and service industries were encouraged and booming.”
The Crash of 1987
“The week of the crash was one of the most exciting periods of my life.” Paul Tudor Jones1
In June 1987, Jones was profiled by Barron’s.